Landmark California Board Diversity Law Ruled Unconstitutional

Author: David B. Weisenfeld

April 5, 2022

The first-of-its-kind California law requiring diversity on corporate boards of directors has been struck down by a state court judge as unconstitutional.

The law, AB 979, required publicly traded companies that are headquartered in California to:

• Have at least one member of an underrepresented community on its board of directors by the end of 2021;
• Have at least two directors from underrepresented communities on its board by the end of 2022 if the company has from five to eight directors; and
• Have at least three directors from underrepresented communities if the company has nine or more directors on its board.

A conservative advocacy group, Judicial Watch, filed a lawsuit challenging the law and argued that it should be struck down because it mandated quotas. In a brief ruling that did not explain the reasoning, Judge Terry Green granted summary judgment to the group. The law had included steep penalty provisions for employers that did not comply, with a fine of $100,000 for a first violation, and $300,000 for subsequent violations.

The measure defined underrepresented groups as:

• Black;
• African-American;
• Hispanic;
• Latino;
• Asian;
• Pacific Islander;
• Gay, Lesbian, Bisexual or Transgender.

It came on the heels of a 2018 California gender diversity law for corporate boards that is facing a similar legal challenge. The law imposed a phased-in set of requirements for the number of women on the boards of publicly traded companies that are based in California.

According to a report by the California Partners Project, the number of corporate board seats held by women at covered organizations has more than doubled since the law was passed. The report revealed that women held nearly 30% of the public company board seats in California as of September 2021, compared to just 15.5% in 2018.

The New York Times noted that while a few other states, including Maryland and New York, have required companies to disclose board diversity statistics, none have enacted mandatory quotas.

California may appeal the judge's ruling, though the state has not yet announced if it will do so. The state defended the law as constitutional, claiming it was needed to reverse a culture of discrimination and that it was put in place only after other measures had failed.